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High Court decision clarifies position on sham contracting

December 4, 2015

High Court decision clarifies position on sham contractingOctober 3, 2016The HR Assured Team

In a unanimous judgment handed down this week, the High Court has ruled that s357(1) of the Fair Work Act 2009 prohibits an employer misrepresenting to its employees that they are engaged as independent contractors, even if the work is arranged through a third party.

What is Sham Contracting?

Sham contracting occurs when an employee is deliberately disguised as an independent contractor. It may occur for a variety of reasons, such as an employer wishing to avoid paying tax or superannuation to the employee, but is not permitted under the Act, and carries heavy penalties for employers found to have engaged in such conduct.

Independent Contractor or Employee?

While there isn’t one single rule to distinguish employees from independent contractors, there are a number of factors which will be considered, such as:

The level of control the individual has over how the work is performed

Whether there is an ongoing expectation of work

Whether the individual is required to wear a uniform or supply their own equipment

Whether the individual advertises their services, or works for multiple employers

Whether the individual is paid regularly or on completion of a task.

While an employee is engaged under an employment contract or contract of service, independent contractors use contracts for services.

The High Court Case

In 2013, the Fair Work Ombudsman brought proceedings under s357(1) of the Act against Quest South Perth Holdings Pty Ltd, a company which provided serviced apartments, on the basis of a misrepresentation that Quest made to two housekeepers after purporting to enter into a “triangular contracting” arrangement with Contracting Solutions.

In brief, Quest engaged Contracting Solutions to employ the housekeepers under contract for services and provided the housekeepers services back to Quest under a labour hire agreement.

Quest then “represented”, through its conduct, that the two housekeepers performed work for Quest as independent contractors of Contracting Solutions, rather than as employees of Quest as they had previously been.

It was noted that despite this arrangement the housekeepers continued to undertake ‘precisely the same work for Quest in precisely the same manner as they had always done’, hence Quest misrepresented to the housekeepers that they were actually independent contractors of Contracting Solutions.

The High Court found that there was nothing to prevent s357(1) from applying to arrangements with third parties, noting that if s357(1) is to be interpreted as only applying to arrangements between the employee and employer, then it would not provide sufficient protection for those employees.

Therefore, if an employment arrangement is misrepresented by an employer as a contract for services, s357(1) is triggered regardless of whether that employment is between the employee and the employer, or a third party.

What this means for employers

This judgment removes any lingering ambiguity from the interpretation of sham contracting arrangements, and closes down a loophole that to date has been used by some employers who relied on the involvement of a third party to shield themselves from sham contracting accusations.

This case also demonstrated that it is irrelevant whether the employees are complicit in the sham contracting arrangement, and that having only partial knowledge of the true relationship is sufficient for the business to be found in contravention of the provision.

Businesses should carefully analyse their relationships with their independent contractors to ensure that no misrepresentations are made about such arrangements.